Preserving Home Value Under Probate

Suppose a person dies with a will in California that leaves a number of assets to his or her children. At this point, the will is subject to probate and must be administered by a California Probate Court. This will be a lengthy process wherein there may be several court hearings and the heirs may fight over the distributions in the will.

In addition, lawyers representing the estate and the relevant parties may have a discussion about fees. The lawyer or lawyers representing the estate will likely ask for 4% of the estate as payment for administering the probate process. These matters and more will be subject to the California Probate Court’s oversight.

Furthermore, assume that one heir wants to sell the house of the deceased. This heir believes that house values are high in the area, and waiting until the completion of the probate process will cause the heirs to lose significant value with respect to the house’s value. Would that heir be able to sell the property to preserve value for the estate as a whole? The short answer is a surprising yes.

Independent Administration of Estate Act

The California Independent Administration of Estate Act, or IAEA, was passed as a measure to preserve home value when a house or property comes under the purview of a California Probate Court. In general and as mentioned, a Probate Court administers the affairs of the estate and oversees the process until the end. While lawmakers find this process as fair pursuant to the California Probate Code, it may not be efficient when trying to retain real estate value.

The real estate market has a long history of being fickle and can rise and fall with regularity. Over the past several years, the real estate market has, overall, done well (a significant exception occurred during the 2007-9 financial crisis). With this in mind, California passed the IAEA, which gives heirs the right to sell property without taking leave on a probate court. The reason behind the IAEA is that a seller would lose buyers if the buyers would have to submit an application to a probate court to buy a property. This deterrent would make it difficult to sell the property because of the hassle of dealing with the probate process.

In sum, an heir can sell a property during the probate process even though the probate court has not made a final determination of which heir owns the property. Upon completion of the sale, the proceeds go back into the estate to be further divided by the heirs under probate court scrutiny. There is, however, a process for allowing the sale of the property.

Notice of Proposed Action

Although the IAEA contemplates the sale of property for parties during the probate process, it requires that all relevant parties agree to the sale of the property. Therefore, if one heir wants to sell the property, such heir must have consent from other heirs. For consent, the heir wishing to sell the property must inform the other parties by serving them with a Notice of Proposed Action, or NPA. The NPA puts other heirs on notice and gives them time to object to a sale. Perhaps one party feels differently about the real estate market or that party really wants the house and does not want to sell. A party not in agreement with the party wishing to sell need only object to the potential sale.

Probate Purchase Agreement

When selling a property during the probate process, the parties must sign a Probate Purchase Agreement, or PPA. In general, sale of a property can be executed between the parties via a private contract. While the sale of the property is public record and state law governs the mortgage process and other aspects of the property’s sale, the parties can execute the actual sale through generally basic bargained for sale negotiation. When selling estate property during the probate process, in addition to the basic legal requirements for the sale of real estate, the buyer and seller must execute a PPA for the sale to be valid. Therefore, in addition to working with a licensed realtor and a real estate lawyer familiar with the legal aspects of property sales in California, the buyer and seller should work with a competent trust and estates lawyer familiar with the PPA and other aspects of probate.

To summarize, potential heirs can sell real estate during the probate process before the case has been resolved. To sell, the seller/heir needs consent via a NPA and must execute a PPA with a potential buyer in addition to the other requirements for property sales.

Thinking about drafting a will? Speak with the law firm of Melanie Tavare, an Oakland trusts and estates attorney.